Life cycle changes will likely impact your finances, including your amount of disposable income and, therefore, the amount that you can save for retirement. If the change results in a reduction in your disposable income, you may need to take steps to improve the efficiency with which you manage your finances, so as to ensure your retirement plans and objectives are not adversely affected. The following are some points for consideration:
Your retirement planning goals and objectives should include your spouse. As such, if you recently got married, your plans should be modified to include factors such as your spouse's income, savings and expenses. Ideally, your retirement plan goals and objectives should be revised and discussed with your spouse so as to ensure any necessary compromises are made. Your budget should be revised to account for any income and expenses attributed to your spouse. Your revised retirement planning goals and objectives should take into account any retirement savings that he or she may own. This ensure that investments are managed effectively, that new contributions are allocated to the right type of retirement account, and that the contributions added do not exceed statutory limits or amounts that you, as a couple, can afford to add.
If your spouse owns retirement savings accounts, ensure that the beneficiary forms for those accounts are updated to name you as the beneficiary. For qualified plans, you are usually automatically considered the primary beneficiary of your spouse's retirement account. However, some plans have a one-year restriction that would prevent you from being automatically deemed the beneficiary until you have been married for at least a year. To prevent any issues, the beneficiary form should be updated, regardless of any plan provisions, as complications can arise if someone else is named as beneficiary and wants to challenge the fact that you are the beneficiary by default. The investment strategies for the retirement accounts that are owned by your spouse should be coordinated with the investment strategies for your retirement savings. Additionally, if your spouse has not already taken all the steps that you have, he or she could benefit by using the strategies, services and resources that are available to you.
If your spouse will not have an income-producing job, consider whether you need to fund an IRA for him or her. Up to $5,000 can be added to your spouse's IRA each year ($6,000 if he or she is at least age 50 by the end of the year). This can go a long way towards funding your joint retirement nest egg.
A divorce will likely necessitate making changes to your retirement planning goals and objectives, as you would now be planning a retirement for one person instead of two - unless or course, your relationship status changes and necessitates planning for two. These changes will likely include revising your investment strategy, your asset allocation model and the amount that you add to your retirement nest egg.
If you must share your retirement savings, which is often required as part of a divorce settlement, work with your financial advisor to determine if it would be more beneficial to give up other assets - assuming your former spouse would be open to the idea. If you are on the receiving end, ensure that if you receive retirement assets as part of the settlement, the amount is paid directly into your retirement account, where it would continue to benefit from tax-deferred growth.
Taking Care of Elderly and Ageing Parents
If you are taking care of elderly or ageing parents, ensure that they have adequate heath and long-term care insurance.
Studies show healthcare costs are one of the largest expenses for retirees. If you are responsible for paying for healthcare for your parents, it could wipe out the sayings you have accumulated over your lifetime, and increase your amount of outstanding debts. This could adversely impact your ability to retire at your plan retirement age, if ever at all. To prevent this from occurring, take steps to ensure that your parents have adequate health and long-term care insurance.
Health insurance can be used to cover general healthcare, doctor visits, surgery and term hospital stays. If the ability to afford premium payments is an issue, you may have the option of obtaining health insurance only for serious illnesses. Nevertheless, consider that the elderly usually require a higher level of healthcare than others, which might necessitate frequent doctor and hospital visits. The costs of these visits can add up to significant amounts over the long term; as such, it is practical to consider whether it makes good financial sense to limit health insurance only to serious illnesses.
Consult with your financial advisor regarding the need for long-term care insurance for your parents. Generally, long-term care insurance is recommend for individuals who might not have sufficient financial resources to pay for the care needed as a result of an illness or injury, which can include helping the individual to perform everyday physical activities. Individuals who are eligible for Medicaid may not need long-term care insurance, as Medical would generally cover most expenses covered under a long-term care insurance program.
If you parent is not eligible for Medicare, the cost of long-term care can deplete their savings and yours. As such, even if you think they have enough money to pay for such care, it might be practical to obtain long-term care insurance. Of course, exceptions generally apply to wealthy individuals who can easily afford such expenses.
In exchange for providing financial support to your parents, consider asking them to name you as beneficiary on any life insurance or retirement savings they may have. The amount that you inherit can help to replenish any savings you may have used, pay off any debts they have outstanding and pay for their final expenses.
For many individuals, changing jobs is inevitable. In some cases, the change is as a result of being laid off or fired; in others, the individual simple decides that it is time to move on to another job or change careers. Regardless of the reason for the change, it usually impacts the individual's finances and, correspondingly, the amount that the individual can add to his or her retirement nest egg.
In order to ensure that you are financially prepared to handle any unemployment gaps between jobs, build up an emergency fund that is sufficient to cover your living expenses during that period. The period for which experts usually recommend an emergency fund should be targeted to cover has increased from a few months to a year as a result of the recent extended poor jobs market.
If you have a new job from which you earn more income, consider allocating a portion of that increased amount to your retirement nest egg, even if you are on target with your retirement savings. This extra amount can provide a financial cushion in the event that you experience financial hardship in the future and are unable to add the scheduled amounts to your retirement nest egg.
Consider rolling over your savings from your previous employer's retirement plan to an IRA or your new employer's retirement plan, if they allow such rollovers. This will help you to keep track of your retirement savings, and if the amount is rolled over to an IRA or other retirement plan that allows you to choose your investments, it would allow for more flexibility with designing your investment portfolio for your retirement savings.
If you decide to roll over amounts from a qualified plan, have the amount paid directly to the receiving retirement plan. If the amount is paid to you, the payor is required to withhold 20% of your taxable amounts for federal income tax. Some also withhold state income tax. In such cases you would be required to make up the withheld amount out of pocket, if you want to roll over the entire amount that was withdrawn.
Avoid any temptations to withdraw amounts, as doing so would require you to include the amount in income and pay any income tax due. In addition, you would owe the IRS a 10% early distribution penalty, unless you qualify for an exception. Consider that withdrawals could adversely affect your retirement plans, as amounts that you withdraw and spend would no longer be a part of your retirement nest and the opportunity to earn compound tax-deferred (or tax-free in the case of a Roth account) growth.
If leaving a job is in your control, be sure to check if contributions made by your employer are subject to a vesting schedule, and if so, whether you are 100% vested in those contributions. If you are not 100% vested, leaving that job would mean giving up the unvested amounts. Your employer has the option of using no vesting schedule for contributions made to qualified plans, a cliff vesting schedule which means you would be 100% vested after three years of participating in the plan, or a graded vesting schedule under which you are required to start vesting after two years and be 100% vested after six years. Even if you are faced with giving up unvested amounts, an increase in salary and other benefits available at a new job may make it worthwhile
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